Canada’s troubling budget path

Canada’s troubling budget path

In New Brunswick’s Telegraph-Journal, AIMS Vice-President of Research John Williamson evaluates the 2016 federal budget. Given Canada’s relative economic health, it is hard to comprehend the decision by the federal government to plunge the country into permanent deficits that will be difficult to eliminate without spending cuts or tax increases.

Canada’s enviable fiscal position – its low debt and relatively low federal tax burden – is the result of wise public policy choices and decades of hard work. Our own Frank McKenna was a pioneer of balanced budgets. Under his leadership, our province was the first in Canada to balance its budget in 1994. That was when New Brunswick was a fiscal leader, not the lagger it is today.

Mr. McKenna was not alone. Saskatchewan’s Roy Romanow and Alberta’s Ralph Klein were other early converts to fiscal reality. The example set by these three premiers – a Liberal, New Democrat and Conservative – was emulated elsewhere in Canada. By 1994, Finance Minister Paul Martin declared that Ottawa would balance the budget “come hell or high water.” Three years and many tough decisions later that promise was fulfilled.

Many Canadians understand there is a high cost to financing government spending with debt year after year after year. Large annual deficits don’t just rack up the government’s credit card and burden taxpayers with interest payments – overtime they also squeeze out spending on social programs and vital infrastructure as more and more is spent on interest. Large deficits increase a country’s borrowing costs and put a chill on economic activity, making it harder for businesses to raise capital to expand. This weakens job creation and puts downward pressure on wage growth. For families it becomes more expensive to borrow for a home, a car or an education. Nations (and provinces) that borrow too much end up with lower growth and higher unemployment.

Since the mid-1990s, governments in Ottawa have, on balance, been prudent and even sensible by avoiding the structural deficits our country experienced in the 1970s, 1980s and early 1990s. When the Chrétien-Martin Liberals rapidly increased program spending in the early 2000s they did so while maintaining a surplus. Returning to a balanced budget was a priority for the Harper Conservatives when large deficits were accumulated following the economic shock of the 2008 Great Recession.

Today there is reason to believe Canada’s twenty-year political consensus favouring balanced budgets has ended with the Trudeau government’s inaugural budget. Federal spending will grow by 7.5% this fiscal year and the red ink will total $29.4-billion. Ottawa’s debt will grow $118.6-billion over the next six fiscal years. This year Ottawa will spend $25.7-billion on interest payments to service its debt. By 2020 that amount will grow 38% as annual payments shoot up by $9.8-billion. This means $35.5-billion in hard-earned, tax dollars won’t be spent on social programs that year but will instead go to paying interest.

Canadians have reason to worry about this development. Not only because Liberals have abandoned a key campaign pledge – made just six months ago – to keep annual deficits below $10-billion, to balance the country’s books in four years, and to lower Ottawa’s debt burden each year relative to the size the Canadian economy. But a second bargain Mr. Trudeau’s Liberals made with voters has been discarded as well. That was to spend mightily on growth enhancing infrastructure – highways, ports, bridges and airports that open markets and ease the flow of commerce. The thinking is with interest rates low and baby boomers nearing retirement now is time to invest, boost private sector output (GDP growth) and lay the foundation for more economic activity to support a larger number of retired seniors. It is a thoughtful policy plan and requires a serious evaluation.

A review of the budget reveals the vast majority of the new spending isn’t dedicated to infrastructure. It doesn’t hit the target Mr. Trudeau laid out on the campaign trail, which was to increase infrastructure spending by $5-billion in each of the next two years. According to the Canadian Press, the budget allocates only $2.7-billion to infrastructure this year and $4.1-billion in 2017. That’s 32% less than the campaign’s promised infrastructure.

Ottawa is instead borrowing billions of dollars to boost what is spent on social programs. Some debt is manageable and a lone deficit budget or even a string of them will not bankrupt Canada. There is good reason to favour the policy to extend EI benefits by five to twenty-five weeks in areas of the country impacted by the energy sector downturn. As the oil sector rebounds people will return to work and EI expenditures will drop.

The Liberal plan to enhance the Conservative policy of providing families with children additional financial support is another laudable objective. What is not prudent is funding social entitlement programs in perpetuity with borrowed money.

This is the most worrisome aspect of the Trudeau budget since entitlement spending is permanent and will increase each year. If the world economy slows over the next few years, Ottawa will be pressured to respond with even more spending. Eventually, we could be back to the late 1970s and 1980s when large annual deficits were permanent and began to drive up inflation, obstruct economic growth and hurt job creation.

Perhaps none of the budget’s largess would amount to much if the Liberals had offered Canadians a plan to spend frantically for a few years and afterward turn off the spending taps. But the budget offers no such assurances. This is the most dramatic change of direction in the budget: Prime Minister Trudeau has abandoned the fiscal mooring that has served Canada well. The federal government is digging Canada into a long-term structural deficit that will not be easily closed.